TETRA Technologies, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
TETRA is a diversified oil and gas services company operating in Fluids, Production Testing, Compression, and Offshore businesses. The filing covers the three and six months ended June 30, 2015. Results include the August 2014 acquisition of Compressor Systems, Inc. (CSI) by consolidated subsidiary CSI Compressco LP (CCLP), which significantly expanded the Compression Division and increased consolidated debt.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $316.3 million | $242.5 million | $567.4 million | $455.3 million |
| Gross profit | $69.9 million | $35.5 million | $115.9 million | $60.3 million |
| Gross margin | 22.1% | 14.6% | 20.4% | 13.2% |
| Income before taxes | $18.1 million | $(2.5) million | $16.1 million | $(13.2) million |
| Net income attributable to TETRA stockholders | $14.9 million | $(2.5) million | $10.5 million | $(9.4) million |
| Diluted earnings per share | $0.19 | $(0.03) | $0.13 | $(0.12) |
| Operating cash flow | Not separately provided | Not separately provided | $82.2 million | $40.6 million |
Q2 revenue increased 30.4% and gross profit increased 96.9% year over year. General and administrative expense rose 16.1% to $37.5 million, but declined to 11.8% of revenue from 13.3%. Net interest expense increased 168.0% to $12.3 million because of debt incurred primarily to finance CSI and subsequent CCLP capital expenditures.
At June 30, 2015, cash and cash equivalents were $41.9 million, including approximately $33.3 million held by CCLP and not accessible to TETRA. Total assets were $2.00 billion and total equity was $755.0 million. Consolidated debt had a carrying value of approximately $936.1 million, consisting of $357.9 million of TETRA debt and $578.2 million of CCLP debt.
Six-month capital expenditures were $73.3 million, including approximately $57.2 million by Compression. Net cash used in investing activities was $69.6 million, while financing activities used $18.0 million. CCLP distributed approximately $15.0 million to TETRA during the first six months.
Material changes versus the prior comparable periods
- CSI acquisition: CSI contributed approximately $96.3 million of Q2 revenue and $6.7 million of pretax earnings before allocated interest and administrative expense; six-month contributions were $167.5 million of revenue and $13.6 million of pretax earnings.
- Compression: Q2 revenue increased 295.0% to $126.5 million, but pretax income declined 72.6% to $1.5 million because higher administrative costs, depreciation and amortization, and interest expense offset higher gross profit.
- Fluids: Q2 revenue increased 5.4% and pretax income increased 91.0% to $32.6 million, supported by clear brine fluids and completion-services activity, improved product mix, cost reductions, and a $2.6 million insurance claim settlement.
- Production Testing: Q2 revenue declined 17.8% to $34.8 million and the pretax loss widened modestly to $0.5 million, although cost reductions improved gross margin.
- Offshore Services: Q2 revenue declined 36.5% to $35.7 million, while pretax income improved to $2.1 million due to cost reductions and fleet optimization. Management expects continued lower demand during the remainder of 2015.
- Maritech: Q2 pretax loss improved to $0.3 million from $10.7 million, primarily because the prior-year period included $11.1 million of excess decommissioning costs. No excess decommissioning costs were expensed in Q2 2015.
- Cash generation: Six-month operating cash flow more than doubled, increasing 102.3% to $82.2 million, helped by CSI, cost reductions, working-capital changes, and lower Maritech decommissioning expenditures.
Outlook, liquidity, risks, and unusual items
Management expects low oil and natural gas prices to continue reducing customer capital spending and activity levels, particularly in Offshore Services, Production Testing, and portions of Fluids and Compression. The company is implementing headcount reductions, vendor renegotiations, working-capital measures, and other cost reductions. CCLP continues to pursue integration synergies from CSI.
Management stated that available liquidity and projected operating cash flows should fund operations, debt obligations, and covenant compliance through June 30, 2016, including repayment of the $90.0 million Series 2006-A Senior Notes maturing in April 2016. As of June 30, TETRA had approximately $121.8 million available under its revolving credit facility and CCLP had approximately $160.9 million available under its separate facility. As of August 7, 2015, TETRA reported approximately $105.1 million of net availability and CCLP reported $160.9 million of availability.
TETRA issued $50.0 million of Senior Secured Notes due April 2017, using the proceeds to fund part of the repayment of the $90.0 million Series 2008-B Senior Notes that matured April 30, 2015. TETRA and CCLP were in compliance with applicable debt covenants at June 30, 2015. The company cautioned that prolonged low commodity prices, weaker operating performance, limited capital-market access, or unsuccessful financing and asset-sale efforts could impair liquidity and covenant compliance.
Remaining Maritech decommissioning liabilities were approximately $50.8 million, with approximately $11.5 million expected to be performed during the twelve months ending June 30, 2016. Actual costs may materially exceed estimates because of damaged offshore structures, unknown subsea conditions, pressured wells, weather, and potential defaults by purchasers or co-owners of previously sold properties.
Goodwill impairment testing indicated that the Production Testing and Compression reporting units exceeded carrying value by only approximately 5% and 6%, respectively. Their recorded goodwill of $53.3 million and $233.4 million could be subject to material future impairment if commodity prices, customer activity, competition, or projected cash flows deteriorate.
Other notable items include foreign-exchange losses, increased financing-cost amortization, tax valuation-allowance changes, and the absence of the $5.7 million TETRA Arabia remeasurement gain recognized in the first half of 2014.
Important facts for investors to verify
- Whether CSI integration synergies and improved Compression cash generation offset the higher debt service, depreciation, and amortization burden.
- The funding plan for the $90.0 million April 2016 maturity and the company’s ability to maintain debt covenants if commodity prices remain depressed.
- How much of consolidated cash and operating cash flow is economically available to TETRA after CCLP debt service, capital expenditures, and distributions.
- Trends in Production Testing and Offshore Services utilization, pricing, backlog, and customer activity.
- Potential goodwill impairment in Compression and Production Testing if projected cash flows or market valuations decline.
- The timing and ultimate cost of Maritech’s remaining decommissioning obligations, including exposure to third-party or co-owner payment defaults.
- Accounts receivable collectability and bad-debt expense given customer financial stress in the energy sector.
- Management’s stated liquidity outlook, which depends on assumptions about operating cash flow, cost reductions, financing access, and future industry activity.